The Transport Finance Law Review: Turkey


i The transport finance industry

Transportation plays a vital role in building, developing and maintaining the infrastructure of a nation, and its interaction with foreign trade partners and countries. It would not be an overstatement to say that without it, an economy will simply cease to exist. As Turkey stands at the crossroads between the east and west, it is of vital importance to preserve the momentum in developing this infrastructure. Investment in aviation, shipping and rail assets is one of the major components of this ongoing process. For various reasons, transport assets in Turkey have been financed almost exclusively by foreign lenders and lessors, with the domestic finance industry playing only a minor role. For this reason alone, the economic, political and legal climate in Turkey has a big influence in attracting foreign finance in this sector.

ii Recent changes


Aviation assets have been financed predominantly by financial leases in the air transport sector. Lessors are exclusively foreign aircraft leasing companies, and Turkish financiers do not have any stake in this sector. Operational leasing of transport category aircraft has increased in recent years in parallel with global trends, and financial leasing transactions have decreased as a result. Financing of business jets and helicopters utilises both financial leasing and secured loans. There are a few local banks that finance business aircraft through their leasing subsidiaries, but foreign lenders and lessors still finance the majority of the fleet.


Turkey has a thriving ship building industry and also a sizable and dynamic merchant marine fleet. Shipbuilding is predominantly financed by local banks whereas acquisition of foreign vessels, both new and second-hand, is predominantly financed by international players in the field.


The Turkish railroad network has recently been opened to private operators, which creates a demand for the acquisition of rolling stock. Municipalities are a major player in the light rail market as increasingly more cities aspire to build or expand their urban transport network. Such infrastructure projects are usually financed by international development banks, while private finance finds a place in financing rolling stock.

Legislative framework

i Overview

At the highest level, commercial loan agreements are governed by the Turkish Code of Obligations and the Turkish Commercial Code, and financial leasing agreements are governed by the Financial Leasing, Factoring and Finance Companies Act. Second-tier legislation covers issues of registration, ownership, mortgages, pledges and liens on transport assets and are different for each category of asset, as follows.


The second-tier legislative instrument in aviation is the Turkish Civil Aviation Act. This Act contains provisions governing registration, ownership, mortgages and other rights in rem on aircraft. Recent amendments to the Act have introduced references to the Convention on International Interests in Mobile Equipment and the related Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, known as the Cape Town Convention and Protocol. The Cape Town Convention and Protocol, which were ratified by Turkey in 2011, can also be considered as a second-tier legislative instrument. Various provisions of the Cape Town Convention and Protocol have been implemented by way of amendments to relevant regulatory instruments, although there is still some ground to cover in this respect.


The second-tier legislative instrument governing ship finance is the Commercial Code, and more specifically Book 5 of the Code, which is titled 'Maritime Trade'. This contains provisions on registration, ownership, mortgages, maritime liens and other rights in rem on ships, as well as provisions regarding enforcement of mortgages and liens. Second-tier legislation includes the 1993 International Convention on Maritime Liens and Mortgages. This was ratified by Turkey as recently as 2017. The ratification instrument stipulates that secondary regulations for the implementation of the Convention must be promulgated, but this is still not completed. However, the existing national legislation is already in line with this Convention.


The second-tier legislative instrument governing rolling stock finance is the Pledge of Movables in Commercial Transactions Act. Unlike ships and aircraft, rolling stock is not subject to registration, and is therefore treated as pure movables. This Act regulates pledges of rolling stock as security in commercial transactions.

Typical collateral instruments in transport finance also include pledges of earnings and pledges of shares. These are also governed by the Code of Obligations and the Commercial Code, and are generally applicable for all asset classes.

ii Domestic and international law and regulation

According to Article 90 of the Turkish Constitution, the applicability of agreements made with foreign states and international organisations is subject to ratification by the Turkish Grand National Assembly. Once an international agreement is ratified, it assumes the force of law and becomes applicable and enforceable just as all other domestic laws and regulations.

Under the Turkish Act on Private International Law and Procedure, the parties to contracts have freedom of choice of law. Choice of law is recognised and respected by Turkish courts. If the parties have chosen to make a contract subject to the laws of a foreign state, the laws of that state will be applied in resolution of disputes that may arise from that contract.

While choice of law is recognised for contracts, it is not recognised in aircraft and ship mortgages. Under the Act on Private International Law and Procedure, mortgages are subject to the laws of the state where the aircraft or ship is registered.

iii Specific practices

Generally, loans for the acquisition of transport assets are typically structured in the form of a loan agreement. Lease finance transactions are structured in the form of a leasing agreement. All financial leasing transactions are required to be registered in the registry of financial leases. Legislation applicable to loan and financial leasing agreements are identical in all three classes of transport assets. Certain types of collateral, such as a pledge or assignment of earnings, pledge of shares, surety and corporate or personal guarantees, are governed by the Code of Obligations. There are, however, important differences between asset classes where the asset itself is collateralised by way of a mortgage or pledge.

Financial regulation

i Regulatory capital and liquidity

There are detailed regulations on capital and liquidity ratio requirements that determine the maximum risk that banks cannot exceed. There are also detailed rules and formulae in regulations for calculation of risk on various financial instruments and assets. These are in harmony with international standards such as Basel III.

Financing of transport assets by Turkish lenders and lessors constitutes a very small percentage of total financing by lenders and lessors in Turkey; therefore, these are unlikely to have a significant impact on the lending capacity of domestic financial institutions.

ii Supervisory regime

Domestic financial institutions that are licensed to engage in lending and financial leasing are regulated by the Banking Regulation and Supervision Agency. The two main legislative instruments in this respect are the Banking Act and the Financial Leasing, Factoring and Finance Companies Act. The Agency has wide regulatory and supervisory powers.

Foreign lenders are subject to their own national legislation: they do not require any special permit or licence to lend or lease to Turkish borrowers and lessors. Under the Turkish exchange control regime, Turkish persons and entities are allowed to borrow and lease from foreign lenders and lessors, provided that the lenders and lessors are duly licensed under their own national regulations. Loans from foreign lenders are required to be utilised through Turkish banks.

There is a notable exception in the case of the leasing of aircraft: the foreign lessor is not required to be a licensed finance institution. The reason for this is that operational leasing of aircraft to a Turkish aircraft operator is treated as a financial lease, even though the intention of the parties and the purport of the agreement is an operational lease.

Security and enforcement

i Financing of contracts


Mortgages have to be executed before a notary public and registered in the aircraft registry to be effective. Sometimes, loan agreements and financial leasing agreements occur back to back, which means that the owner of the aircraft uses a loan to acquire the aircraft and simultaneously leases it to an operating entity such as an airline or business jet operator. In all cases, the lender or lessor is protected by national legislation as well as the Cape Town Convention and Protocol. The Protocol provides means of very quick repossession of an aircraft if the borrower or lessee is in default: such quick repossession would not be possible under domestic legislation in the absence of the Cape Town Convention and Protocol. The Protocol provides a mechanism for rapid deregistration and export of an aircraft upon request by its lessor or mortgagee. This is called the irrevocable deregistration and export request authorisation, and it authorises the lender or lessor to request immediate deregistration and exportation of the aircraft. This is issued by the borrower or lessee and has to be registered with the aircraft registry. In practice, this mechanism has been utilised on numerous occasions in Turkey and provides fast relief to lenders and lessors.

It is important to note that under Turkish financial leasing regulations, any leasing of aircraft to Turkish operators by a lessor for a term of at least two years is treated as a financial leasing. Financial leasing agreements include a purchase option to the lessee, and the total of lease payments throughout the lease term is roughly equal to the market value of the aircraft. Operational leasing agreements, however, do not include a purchase option, and the present value of lease payments throughout the lease term is substantially less than the market value of the aircraft. From an operational and financial point of view, these are not financial leasing agreements. Despite this, Turkish law treats these as financial leasing agreements and not ordinary leases.


Shipping loans are secured with a mortgage on the ship, pledge of earnings, pledge of shares, operating agreements, subordination agreements and other ancillary documents as warranted by the specific circumstances of a deal. Mortgages have to be registered in the ship registry to be effective. It is also possible to register a mortgage on a shipbuilding project, which will be carried over to the ship itself once it is completed. Financial leasing of ships presents its own challenges for a lessor, as the lessor also happens to be the owner of the vessel and, as such, can be held liable for claims arising from a plethora of events such as accidents, environmental damage, cargo claims and crew claims even if it is not the operator of the ship. Adding to the complication is the rule that most of these claims are protected with a maritime lien, which will take priority over a registered mortgage.


Loans for railway rolling stock can be secured with a pledge, which is subject to registration in the special registry for pledged movables. The Pledge of Movables in Commercial Transactions Act entitles the pledgee to take possession of pledged assets in cases of default by the debtor. Turkey is not a party to the 2007 Luxembourg Protocol on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock.

ii Enforcement

Judicial enforcement

Enforcement of a mortgage or pledge is governed by the Turkish Enforcement and Bankruptcy Code. The enforcement procedure is carried out by the enforcement office. Enforcement offices are an extension of courts and, as their name implies, their duty is to enforce court decisions. However, the presence of a court decision is not a prerequisite for initiating an enforcement action for registered mortgages or pledges. Upon request by the mortgagee or pledgee who presents proof of the registered mortgage or pledge, the enforcement officer will send a payment order to the debtor indicating that, unless the debt is paid within a short deadline (from seven days up to a month depending on the type of mortgage or pledge), the mortgaged or pledged assets will be arrested and sold through public auction. If the payment order is not complied with, the enforcement officer will then seize the asset in preparation for a public auction. The debtor can object to the payment order within the payment deadline, before the supervisory court of enforcement. The supervisory court of enforcement will decide on any objections on the validity of the mortgage or pledge and the amount of alleged debt. The burden of proof that outstanding amounts have been paid rests with the debtor.

In the case of contested repossession of leased property, enforcement of a repossession requires a court decision. An injunctive repossession can be granted by a court pending a final decision; however, the court will in most cases require the lessor to deposit security, which can be as high as the value of the leased asset. Conversely, failure to return an asset where the lease has expired or is otherwise lawfully terminated constitutes the offence of breach of trust, which is punishable by a prison sentence. This is a powerful deterrent for a lessee to refrain from hanging on to an asset where the termination is lawful.

Repossession of aircraft, whether mortgaged or leased, is subject to the rules of the Cape Town Convention and Protocol. Turkish courts have consistently applied the protections afforded by the Cape Town Convention and Protocol, and have ordered repossession of leased aircraft as an injunctive relief pending a final determination without requiring the lessor to deposit security. It is possible for the mortgagee of a repossessed aircraft to sell the aircraft and apply the proceeds to their credit.

Self help

As a rule, self help is not allowed under Turkish Law. However, the Cape Town Convention and Protocol, and the Pledge of Movables in Commercial Transactions Act, have introduced exceptions to this rule. Under these, a mortgagee, pledgee or lessor is entitled to take possession of the aircraft or other pledged property. While this remains true on paper, there are very practical safety concerns regarding such an approach, especially where a debtor or lessee opposes it.

iii Arrest and judicial sale

Arrest of aircraft

Arrest of aircraft (and all other movable assets, except ships) is governed by the Code of Enforcement and Bankruptcy, and in particular the section titled 'Precautionary Attachment'. Precautionary attachment is a means by which a creditor can secure its credit by attaching assets of a debtor prior to starting any enforcement action or lawsuit. This must not be confused with an arrest under a mortgage enforcement action, as explained in Section III. An arrest under a precautionary attachment can be requested from a commercial court by presenting prima facie evidence of the debt. Precautionary attachments can be granted only where there is a reasonable probability that the debtor is likely to hide assets or is insolvent, or under any other similar circumstances that may make it impossible for the creditor to extract its rights if immediate action is not taken. Turkish courts have wide discretion on whether to issue precautionary attachment orders. If the debtor is a company registered and based in Turkey, it is difficult to get an attachment order unless it can be proven that the company is generally insolvent or is attempting to hide assets. However, it is more likely to be issued if the debtor is a foreign company who does not have any assets in Turkey other than the aircraft.

A precautionary attachment order requires the creditor to post a security of at least 15 per cent of the claim amount as a security against probable wrongful arrest. An arrest order on an aircraft is enforced by notification to the airport and air traffic control unit, who will not allow the aircraft to depart. Once an aircraft is arrested, it has to be put under the custody of an independent custodian. The creditor has to start an enforcement action or a lawsuit to prove the debt within seven days of the arrest. The debtor is entitled to request the court to release the aircraft by posting security. The amount of security is decided by the court and is usually determined to cover the alleged debt and a further sum to cover interest and litigation expenses.

Arrest of ships

The arrest of ships is governed by special provisions laid down by the Commercial Code. Ships can be arrested by way of a precautionary attachment if the creditor can present prima facie evidence to the maritime court that the debt is a maritime claim as defined by the Commercial Code. Maritime claims are exhaustively enumerated in the Code: in essence, they are debts arising from the financing and operation of merchant vessels. Unlike precautionary attachments on aircraft and other movables, it is not necessary to convince the court that the debtor is insolvent or trying to hide assets. If the claim is a maritime claim, the precautionary attachment will be granted. The creditor is required to post security equivalent to 10,000 special drawing rights as security against a wrongful arrest. The arrest is executed by informing the port authority and coastguard, who will prevent the vessel from sailing. Foreign vessels transiting the Turkish Straits without calling at a Turkish port cannot be arrested. Arrest of a sistership for a maritime claim incurred by another ship is possible only if the owner of both vessels is the same at the time of arrest. The arrest can be set aside by the court if the debtor deposits security sufficient to cover the principal debt, interest and expenses. The creditor is required to commence a lawsuit within one month of the arrest. Depending on the circumstances, filing a lawsuit in a foreign country, or commencing an arbitration process, will also fulfil the requirement of commencing a lawsuit within one month.

Wrongful arrest

The court that issued the arrest order is also competent to judge claims arising from wrongful arrest. Compensation for wrongful arrest will typically include the loss of earnings, as well as all other costs arising from having to keep the vessel safe at the port where it is arrested.

Judicial sale of ships and aircraft

Judicial sale of ships and aircraft is conducted by the enforcement office. These procedures are applicable to all judicial sales regardless of whether they are the result of the enforcement of a debt or a mortgage, or for the liquidation of assets in bankruptcy proceedings.

First, a valuation is obtained from an expert panel. All concerned parties have a right to object to this valuation before the supervisory enforcement court. Once the valuation is complete, an auction specification is prepared by the enforcement officer, and this is published through appropriate nationwide media. In the case of ships, this also has to be published in international shipping publications. The auction specifications must indicate the date, time and place of two auctions, which cannot be less than 15 days apart, the appraised value, the bid bond required and other details. It is also possible to place bids by electronic means before the date of the live auction. For the auction to result in a sale, the highest bid must be at least 50 per cent of the appraised value, and must also exceed the total of claims secured with a mortgage, and expenses. If no such bid is obtained at the first auction, the auction is repeated on the date published in the auction specifications. If this minimum bid is not obtained in the second auction, the auction is called off.

Current developments

i Recent cases

In a recent ruling by a Turkish regional court of appeal in a case on repossession of an aircraft, the court decided that a lessor is entitled to the remedies provided by Article 13 of the Cape Town Convention and Protocol. Article 13 provides that a contracting state shall ensure that a creditor who presents evidence of default by the debtor may obtain possession of the aircraft pending final determination of its claim. The aircraft was thus handed over to its lessor, without the requirement to post security, prior to commencement of substantive proceedings to determine whether the debtor was actually in default. This is a landmark decision because a remedy of this nature is not ordinarily available under domestic Turkish law, and even where it is, the creditor is required to post a substantial security to secure a possible claim for unjust detention. This is a positive development and has raised the credibility of the Turkish legal and judicial system in the eyes of the international aviation finance community.

ii Developments in policy and legislation

While most of the secondary legislation required for the full and precise implementation of the Cape Town Protocol in respect of aircraft is in place, there is one issue that remains uncertain: the enforcement process for repossession requires the enforcement officer to send a repossession order to the borrower or lessee. While the Enforcement and Bankruptcy Code says that the aircraft must be returned within three days upon receiving the order, it does not specify what the enforcement officer can or cannot do if the aircraft is not returned within three days. The Code leaves this to secondary regulation to be promulgated by the Ministry of Justice, but no such regulation has been issued yet.

iii Trends and outlook for the future

In the aftermath of the covid-19 pandemic, which dealt a serious blow to aviation, the industry is now on its way to recovery, fuelled largely by the dramatic growth in cargo traffic. Deals have increased, especially due to high demand for cargo aircraft or conversions of passenger aircraft to cargo, and passenger traffic is also picking up. Therefore, the overall outlook for the industry is positive. This being said, the sudden spike in inflation to double digits in Turkey coupled with the rapid devaluation of the Turkish lira has blocked any possible increase in demand. The pandemic situation has also stimulated demand for shipping assets, although the logistics and supply chain problems remain an impediment. Rail is expected to pick up its pace in terms of growth as private enterprises seek to capitalise on the recent deregulation of the industry, and urban networks push for expansion.


1 M Ali Kartal is the founding partner of Kartal Law Firm.

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